Calendar Spread Options Strategy

Calendar Spread | Profits In Any Market With A Calendar Spread

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Introduction to Calendar Spread Options Strategy

 The most popular Options spread the Calendar Spread, and the reason for this is that it is a non-directional trading strategy, time decay strategy and Positive Vega Strategy. We actually benefit from the increase in volatility. With this article, we can learn all about Single Calendar, Double Calendar and Triple Calendar along with adjusting and managing a Calendar. We can learn about automatically adjusting the calendar even without watching the market using AutoPilot.


What is a Calendar Spread and What is a Reverse Calendar Spread

In this article, we can know all about Calendar Spread, How do we enter the trade, manage and adjust the trade and how do we exit the Calendar Spread for a loss or for a profit. A Calendar Spread is also known as a Time spread or Horizontal Spread. Here we can be selling the front month and buying the back month of the same strike. It really doesn’t matter whether it can be done on a Put or on a Call. It is a positive Vega trade which means if the volatility goes, we could benefit from it. It is also a Positive Theta Trade meaning we earn time decay by putting up a Calendar Spread.

 Single Calendar Spread:

In a single calendar spread risk graph, if we start trading right at the centre or even on the two sides and the market having the buyers within these two ranges, then the calendar spread will make money. If the stock expires outside of the ranges set, then we are going to lose money.

 Double Calendar Spread:

In a double calendar spread, we buy two calendars on two sides with the market at the centre. Comparing this with the single calendar the breakeven is a bit wider, and the market will have more room to move. As long as the market has buyers within the two even ranges, this spread will make money. Buyers outside the ranges mean we will lose our money. This is considered to be a limited risk spread as this will be initiated with debit. Though it is started with a debit, we can earn with the time decay.

 Triple Calendar Spread:

Buying three calendars is called a triple calendar spread. In this spread, the breakeven will be even a bit higher than a double calendar. We should not start doing a three calendar spread because if the market expires outside the ranges set, then will be a risk of losing quite a lot of money. As the triple calendar spread is wider, the chances of market expiring outside of the breakeven are very less though it is not recommended to start off with this spread directly. We should always start with a single calendar and adjust it to the double calendar spread if necessary. Most of the time, we will stop at the double calendar and exit after making profits. We may also adjust it to the triple calendar; however, the risk involved here is very high, and it is recommended not to go beyond the triple calendar.

 Reverse Calendar Spread:

It is the opposite of a normal calendar spread where we buy the front month and sell the back month. It is a negative Vega and negative theta trade, meaning we sell the volatility and buy the time decay.


An Illustration of a calendar spirit from start to finish

As an overview, we are going to do a non-directional calendar spread, i.e. we will not be predicting the markets. We will have the calendar spread with the market at the centre between two breakeven points. With the market in the centre can’t know whether it will move up or go down. With the two ranges set we will have the profits zone as shown with diagonal lines in the picture below. We always have two contracts for the calendar spread. We will be adjusting our calendar spreads at one or two sides as the market moments. As the market moves up, we will be adjusting on the right side, and if it moves down, we will be adjusting on the left side of the spread. When we are adjusting we are making use of 2 contracts.

 When we assume the market will move up after an hour, adjust the calendar right side where the market denoted with a cyan marker near pointer on a horizontal line below.

 Now we will add two more contracts, including the earlier two contracts. Now the profit zone in the double calendar spread looks as denoted with diagonal lines in the picture below. With the market at the centre, we do not know whether it will move up or down.

 If we assume it may move up (denoted with a red arrow towards the right) further, we can make our final adjustments. If we want to adjust it to the triple calendar, we may close one of the two initial contracts and start a new contract which is denoted to extreme right side rounded with 1 in the picture below which will make it a triple calendar spread.


Single Calendar, Double Calendar or Triple Calendar 

 Here we are going to discuss single, double and triple calendars and examine which one would be preferable. The advantage of a single calendar as we can still adjust it to a double calendar. If the market is at the centre of the single calendar, we do not predict the market moments. It may go down or go up. If the market rises, we can adjust on the right side, or if it goes down, we will adjust it on the downside. One big advantage of the single calendar is we can know when to adjust the calendar as per the market moves. When adjusting to the double calendar note that the risk graph is not close to (or touches) the zero line as shown below:

 In triple calendar is very wide, but simultaneously it has greater risk factors involved which we need to understand better before taking this adjustment. It is not recommendable to go to the triple calendar; the most we can stop at is the double calendar. However, we may, at times, adjust it to the triple calendar after careful observations. It depends on the trader about which one is preferable but always go with the single calendar, which has very fewer risk factors.

 Comparing Iron Condor Vs Calendar Spread

 Both the Iron Condor and Calendar Spread are popular options strategies which earn from time decay and not directional. Compared to the calendar, the iron condor is harder to adjust. In the calendar, we will sell front and buyback, which will always have more value than the front month, which is a major difference from iron condor. Both are positive thetas where we earn money from time decay as long as the market stays within the range. The Iron Condor is a negative vega trade whereas a double calendar is a positive vega trade which means if the volatility goes up the calendar spread, on the whole, will benefit from it. Negative vega means if the volatility drops, iron condor will benefit from it, but when there is a crash in stock markets which results from greater volatility also effects on the iron condor with a loss. In the case of double calendar spread if the markets crash, the increase in volatility will result in profits.

 The importance of Liquidity and Commission in Calendar spread.

 Because the calendar spread involves multiple buying, we can leave the calendar to expire, so we have to close out the calendar before expiry. We are examining this with the monthly trading, which has the highest liquidity. Let’s say selling the April and buying the May we can have the high liquidity options available. When we are trading with a calendar spread, we need to do it in the liquid markets and do not mess up with the weekly trading options.

 Exiting a Calendar and Golden Rule of Trading a Calendar.

 It is always recommended to always keep the Profit vs Stop Loss to a 1: 1 risk-reward ratio. We do not want to be risking $100 to make $20, which is senseless while doing, in the long run, we lose more than we earn actually. This applies to any strategy, not just the calendar strategy. If there seems to be profit 1 to 2 weeks, the expiration exiting from the trade is beneficial. This is because we cannot expect anything going to happen in the last week and the reason for this if the seller is weak with money one side we may get simul on the short which in turn results in a complete mess of our profit graph and maybe whole trade mess-up. As long as the sell native has spun valueless, there should be no assignment issue. But when it comes close to the expiration, 2 or 3 days before expiration, we may be assigned on the short leg. This is the reason we may exit the calendar 1 to 2 weeks in advance. One more important point is that if we have already set up the triple calendar and the market moves to either side of the breakeven, close of the whole trade even if we have not hit the stop loss. We may some times go beyond the triple calendar by keeping the 4th, 5th, and so on however the as the calendars increase the risk also will increase. If the trends are going strong in the market, the trader will suffer a big loss by adding more calendars.

Golden Rules of Calendar Spreads:

  1. The calendar is ideal for Low IV environment as it is a positive vega trade, meaning we are buying volatility. As we are selling the front month and buying the back month, the back month always has the higher IV we can treat it is as a positive vega trade.
  2. The loss is a part of the game so try to accept it if occurred.
  3. Some strategies will require us to keep on throwing the calendars by widening the breakeven. However, the risk involved by doing so will be very high. If the markets are strong, then we can be bitten by the market very harshly.
  4. Always start with a single calendar.
  5. We do not want to predict the market. Instead, we want the market to tell us where it wants to go so that we can adjust the calendars accordingly.
  6. Always start with an even number, start with at least 2(it will be useful when we want to adjust to the triple calendar) set of calendars or 4 or 8.

Entering a Calendar Spread – Start with a single calendar first.

When we are unsure about the market moments like whether it will go up or down, we will choose a single calendar. We will then adjust it only if there is a moment in the market, so it is preferable to always start with a single calendar. We will let the market to tell us before we are going to adjust the calendar. We can add up the calendar if the market goes up at the PUT side buying the back. This will increase our breakeven. If the market would have come down, then we can adjust the calendar by throwing in a PUT calendar. This is how we turn a single calendar to a double calendar keeping in mind the risk factors.